This post is part of a series of posts designed to help you acquire a loan for your small business. The following posts cover methods for public financing of your small business

Short-term Guaranteed Loans

Contract Loan Program.

The purpose of this program is to provide working capital needed to handle short-term contracts. A business must have been in operation for 12 months preceding the date of application. Any small business which constructs, manufactures, or provides a service under an assignable contract is eligible. An application must be filed for each contract. More than one contract may be outstanding at any one time. All disbursements must be supported by invoices and/or time sheets. Maturity is generally not more than 12 months. Applicant’s ability to cost the work, bid, and perform is a prime requisite. Cash flow projections are mandatory. SBA requires an acknowledged assignment of the contract proceeds as collateral, however, the lender is expected to take such additional collateral as prudent lending practices dictate. Proceeds or an agreed-upon percentage must be applied to the loan balance. The percentage must be set forth in the loan authorization and note. If bonding is necessary and the surety requires an assignment of the contract, SBA will consider only other collateral that is worthwhile. The guarantee fee is one quarter of 1 percent of the guaranteed portion of the loan.

Seasonal Line of Credit.

The Seasonal Line of Credit program is used to finance working capital needs arising from the seasonal upswing of a business. Typical uses are to build up inventory and to pay for increased labor costs. Loans are repaid from the cash flow of the business. This program may have a limited revolving feature and is only available under the bank guarantee program. To be eligible, a small business must have been in operation for the previous 12 months and have a definite pattern of seasonal activity. Only one seasonal line of credit may be outstanding at one time and followed by an “out of debt to the SBA” period of at least 30 days. The applicant must be current on payroll taxes and have in operation a depository plan for payroll taxes. A cash flow projection showing the business’ ability to provide for its needs is required. Maturity may not exceed 12 months. As a minimum, collateral will consist of inventory and accounts receivable. The guaranty fee is one quarter of one percent. These loans may not be sold on the secondary market.

Export Working Capital Program.

Under this program, the SBA guarantees short-term working capital loans made by participating lenders to exporters. Proceeds of loans guaranteed under this program may not be used to purchase fixed assets, but can be used to finance the acquisition and production of goods and services being exported, or the accounts receivable of export sales.

Proceeds guaranteed under this program can be used for single or multiple export sales, and the underlying loan can be a revolving one. The maximum maturity is one year. Eligibility requirements with respect to the size of the borrower, the amount of the guarantee and the loan are the same as for the SBA’s regular guaranty program. The borrower must have been in business for at least 12 continuous months before filing an application.

Asset-Based.

This program provides a guarantee of a short-term revolving line of credit, based upon the value of the borrower’s accounts receivable and inventory.

The maximum term of an Asset-Based loan is five years, and the balance of the line of credit can revolve, in that it can be drawn upon and repaid as the borrower’s cash cycle dictates, so long as the outstanding balance does not exceed the approved amount of the Asset-Based account. Under this program, the SBA can guarantee up to $1 million of the line of credit, and the SBA’s guarantee cannot exceed 75 percent of the total line of credit. Generally, any business eligible under the SBA’s regular guaranty program will be eligible.

The SBA uses the same interest rate structures as under its regular guaranty program. Unlike the regular guaranty program, under the Asset-Based program no lender’s fee restrictions apply, although the lender must disclose all fees charged in connection with the loan through its final payout. Personal guarantees are required of each person who owns 20 percent or more of the borrowing business.

Participating lending banks must have reached a 750 agreement with the SBA and completed a lender’s registration (different from the Low-Doc registration) with the SBA. The lender must conduct field examinations of borrowers, both initially and at least semi-annually during the term of the line of credit, including an analysis of accounts receivable, inventory, accounts payable, and financial statements and accounts. The lender, however, can hire a third-party server.

In the event of default, the SBA will pay on the guaranty after the pledged assets have been liquidated, but the SBA will pay only the interest that has accrued more than 120 days after the date of default.

Dealer Floor Planning.

Under this pilot program, SBA provides loan guarantees for lines of credit through its 7(a) program. Loans are made through SBA lenders only for inventory that can be titled, such as autos, RVs, manufactured homes, boats and trailers. The pilot program runs through September 30, 2013.

Loans are available for a minimum of $500,000 up to $2 million allowable under the 7(a) program, with a maximum repayment term of five years. These loan guarantees will be from 60-75 percent, depending on the type of collateral and the lenders advance rate against the wholesale price of the inventory. Lenders may advance up to 100 percent of the wholesale price.

CREDITS: This is an excerpt from A Guide to Starting a Business in Minnesota, provided by the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, Twenty-eighth Edition, January 2010, written by Charles A. Schaffer, Madeline Harris, and Mark Simmer. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office.